Cash Rents Steady for 2018

DES MOINES (DTN) -- It may be early to think about cash rents for 2018, but in Iowa, farmland owner-tenant rules require lease change notifications on or before Sept. 1. So, in late July and August, Iowa State University Extension hosted more than 80 farmland leasing meetings across the state. The general consensus from those meetings is that landowners may not be that generous in lowering rents for 2018.

"Land rents will probably come down," said Steve Johnson, ISU central Iowa farm management specialist, "but only slightly."

That's not to say all cash rents will be steady. In the drought region of southeastern Iowa, ISU Extension specialist Ryan Drollette reported cash rents will likely drop as a result of dismal corn yields ranging from zero to 130 or 140 bushels per acre, instead of 200 bpa. "But in areas where yields are good, farmland owners do not appear to be as willing to reduce cash rents," said Drollette.

In north-central Iowa, low-end cash rents won't change, predicted Kelvin Leibold, ISU farm management specialist. However, he said most high-level cash rents will likely decline. "One landowner told me he was reducing his cash rent next year from $300 an acre to $260 on ground that typically produces 200 pba corn," said Leibold.

For 2017, Iowa average cash rents declined 4.8%, or $11 per acre. "You saw steeper declines, in the 10% to 20% range, on the higher-priced cash rents," Johnson said. "In central Iowa, we saw a few high-end cash rents drop nearly 10% in 2017. For 2018, I think most cash rent declines will be in the single digits."

Several factors lean toward steady cash rents:

1) Land values have stabilized.

2) Real estate taxes are still high.

3) Most cash rents decreased in 2017, and owners may think that's enough.

4) Most tenants don't look like they're suffering -- they are not trading in any vehicles or equipment for older models.

5) If the bank doesn't finance that cash rent for 2018, another area farmer could likely be found to farm the ground.

STABLE LAND VALUES

USDA's Aug. 3 farmland value report showed Iowa with a 1.9% increase in average farmland value over 2016. Nebraska, Missouri, Illinois and Ohio reported less than a 2% decline. Even the Corn Belt state with the largest decline, Indiana, only saw a decay of 2.1%.

"People thought land values would drop more, but there is just not much land for sale," explained Steve Bruere, president of People's Company, which tracks farmland sales in Iowa. "Right now, there are only 130 farms (with 85% tillable acres) in the entire state of Iowa listed for sale. That inventory is extremely low," said Bruere. "More people want to own farmland than there are farms for sale, and 80% of everything for sale is being bought by farmers (who are willing to bid up nearby land)," he added.

Two parcels in central Iowa's Polk County auctioned for $10,000 and $11,000 per acre (typical yields are 200 to 210 bpa corn) this week, Bruere noted. In a July sale in Scott and Clinton counties in eastern Iowa, three parcels brought between $10,750 and $13,500 per acre.

Farm Credit Services of America Senior Vice President and Chief Risk Officer Mark Jensen also reported a recent strong land sale with a half section of land in central Iowa selling for $12,000 per acre last week.

However, not everyone believes these prices spell the end of the decline in farmland values. Jensen noted, "We expect a 20% to 30% decline from peak prices [of 2013] and, so far, farm real estate values have fallen 21% in Iowa, 15% in Nebraska and 10% in South Dakota from their peak levels. We're not at the bottom yet," predicted Jensen.

For that to happen, Bruere said, we'll need to see more land come on the market and less aggressive buyers. Maybe that will happen this winter as lenders clamp down on unprofitable farm borrowers. But that's not happening yet.

HIGH PROPERTY TAXES, CRP ALTERNATIVES KEEP OWNERS WARY OF LOWER RENTS

Nebraska has the unenviable position of having the highest real estate tax rates in seven Midwest states, according to a USDA study. Real estate taxes on prime, irrigated ground in the eastern third of Nebraska range from $80 to $120 per acre. That's on land that can produce 220 to 250 bpa corn. Iowa and Minnesota follow Nebraska with high agricultural real estate taxes.

High CRP rates have also bolstered cash rents, said Leibold. "Why rent to a young farmer for $250 an acre when you can get $300 an acre from the government by putting your land in the CRP?" Leibold wondered. "In Hardin County, in 2016 and halfway through 2017 (until they capped the CRP payment at $300 per acre), you could lock in a Conservation Reserve Payment of $360 per acre. I think USDA was using rental survey data from 2015. CRP payment rates will likely drop in 2018, but for now, it is a factor in higher cash rents," Leibold said.

TIGHT PROFIT MARGINS WILL SQUEEZE OPERATORS

With commodity prices abysmally low, "agricultural lenders will look at 2018 cash-flow numbers and say, 'I'm not financing that cost structure.' So, operators will be looking to cut cash rents because that is their highest cost on a per-acre basis," Johnson told land owners at the farm leasing workshops.

Even lower rents may not improve profits much, noted Leibold. He said he figures the decrease in cash rents since 2013 has basically matched the decline in government program payments. "In Hancock County, Iowa, on a farm with 100% corn base, the ARC farm payment of $73 per acre in 2014 will likely be $0 in 2018. So, a cash rent decline from $275 per acre to $200 doesn't improve the cash structure of the farm," Leibold said.

In most farm owner/tenant arrangements, relationships still matter. One central Iowa landowner attending the workshop told DTN she trusts her tenant. "He took care of me when corn prices went up, and I want to keep him as a tenant," she explained. However, she also said she didn't think her rent would change much for 2018.

Johnson concluded, "I don't think we'll see much of a drop in 2018 compared to the total decline of 21% in cash rents since the 2013 peak. I think the overall cost of production could likely fall another 5% in 2018, and a small percent will be from lower cash rents."

Elizabeth Williams can be reached at elizabeth.williams@dtn.com

(BAS/AG/CZ)

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